Speaking to the Herald, S&P director of sovereign and international public finance ratings, Martin Foo, believed investors would still be keen to buy New Zealand Government Bonds.
But with other governments also issuing a lot of debt, the New Zealand Government may need to offer investors more attractive interest rates to get the bonds sold.
The demand for bonds will still be strong, Foo said.
“There are plenty of buyers out there – both offshore and domestic – but it comes at a price – like all things.
“Increased supply [of bonds] will probably put some upward pressure on bond yields relative to where they would otherwise have been.”
Treasury forecasts annual core Crown finance costs rising every year until they hit $12b in 2028/29.
The issue is, the Government can’t start repaying its Covid-era debt until it gets its books back in surplus. So it’s renewing its old debt, while issuing new debt to pay for new expenditure.
Net core Crown debt is expected to rise to 45% of GDP in 2024/25, before peaking at nearly 47% in 2026/27.
For context, net core Crown debt fell below 20% of GDP before Covid.
Foo said S&P was still digesting Treasury’s updated economic forecasts, but admitted the extent of the “slippage” in the numbers was a “slight surprise”.
He said New Zealand’s AA+ credit rating still carried a stable outlook, but the risks around this rating may be tilted slightly more to the downside now than they were in the past.
“We’ve pointed to large deficits in countries like France and the United States as being a downside risk, and I think we need to be increasingly calling that out for New Zealand as well,” Foo said.
The budget deficit, known as the operating balance before gains and losses (obegal), is expected to widen to $17b in 2024/25.
The Government isn’t at this stage planning to introduce major new measures to cut spending or increase its tax take, beyond hiking some existing levies and introducing more tolls, and methods including congestion charging so users of new infrastructure contribute more towards paying for it.
Rather, Finance Minister Nicola Willis is telling government departments to find more savings, and warned the majority wouldn’t receive new funding in Budget 2025.
She is sticking to her commitment to only increase operational expenditure by $2.4b in each of the next few budgets.
But with much of the $2.4b pencilled in for Budget 2025 already allocated, Willis will only have $700 million available for new operational expenditure – if she sticks to the allowance she set herself.
As for capital expenditure, she committed to increasing this by $3.6b a year, slightly more than previously planned.
“The next time we meet with the Government, we need to be asking some questions about the credibility of those operating allowances and whether the path back to surplus is actually genuine,” Foo said.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
